Problem 1
This question is about the balance of payments of a country named Outland.
The currency of Outland is the U.S. dollar. Assume that during the entire year 2023, the exchange rate of U.S. dollars to euros is 1.5 U.S. dollars per euro.
(a) Outland starts 2023 with holdings of 100 shares of the German car company Volkswagen. These securities are denominated in euros. The rest of the world holds 200 units of bonds denominated in U.S. dollars issued by the Outlandian government. At the beginning of 2023, the price of each Volkswagen share is 1 euro and the price of each unit of Outlandian bond is 2 U.S. dollars.
Compute the net international investment position (NIIP) of Outland at the beginning of 2023.
(b) During 2023, Outland exports toys for 7 U.S. dollars and imports shirts for 9 euros. The rate of return on the Volkswagen shares was 5 percent and the rate of return on Outlandian bonds was 1 percent. Residents of Outland received money from relatives living abroad for a total of 3 euros and the government of Outland gave 4 U.S. dollars to a hospital in Guyana. Calculate the Out-
landian trade balance, net investment income, and net unilateral transfers in 2023. What was the current account in that year? What is the Outlandian NIIP at the end of 2023 expressed in U.S. dollars?
(c) Suppose that at the end of 2023, Outland holds 110 Volkswagen shares. How many units of Outlandian government bonds are held in the rest of the world?
Assume that during 2023, all financial transactions were performed at the beginning-of-year prices. Also, assume that there are only two types of assets this world, Volkswagen shares and Outlandian government bond.
(d) To answer this question, start with the international asset and liability positions calculated in part (c). Suppose that at the end of 2023, the price of a Volkswagen share falls by 20 percent and the dollar appreciates by 10 percent.
Calculate the end-of-year NIIP of Outland in U.S. dollars.